What Happens After a House Appraisal?

A home appraisal represents an important step in any real estate transaction, serving as an independent, professional assessment of a property’s market value. This process provides an unbiased opinion, safeguarding both the lending institution and the prospective buyer or seller. By establishing a fair market value, the appraisal helps ensure that the property’s worth aligns with the proposed loan amount or purchase price. This standard procedure instills confidence and mitigates financial risks for all parties involved in the real estate exchange.

Receiving and Understanding the Appraisal Report

Once the appraisal inspection is complete, the appraiser compiles their findings into a comprehensive report. This report is typically delivered to the lender, who then shares it with the buyer. While sellers do not always receive a copy directly, they can often request it from their real estate agent or the buyer. The appraisal report is usually received 6 to 20 days after the appraiser’s on-site visit.

The most common document used for residential appraisals is the Uniform Residential Appraisal Report (URAR). This standardized form contains several sections providing a detailed analysis of the property. It includes subject property information, such as address, size, age, and neighborhood characteristics. A significant portion of the report is dedicated to the sales comparison approach, which analyzes recent sales of comparable properties (“comps”) in the area, adjusting for differences between them and the subject property. The report also features a condition assessment, identifying any property issues, and ultimately presents the appraiser’s final opinion of value.

How the Appraisal Affects the Loan Process

The appraised value directly influences the financing aspect of a real estate transaction. Lenders rely on the appraisal to determine the maximum loan amount they are willing to provide, as the property serves as collateral for the mortgage. They use a metric called the Loan-to-Value (LTV) ratio, which compares the loan amount to the lower of the property’s purchase price or its appraised value. For instance, if a home is appraised at $200,000 and the loan is $160,000, the LTV is 80%.

If the appraised value matches or exceeds the agreed-upon purchase price, the loan process proceeds without significant hurdles. This scenario confirms to the lender that their investment is adequately secured, as the property’s value supports the loan amount. A lower LTV ratio, often achieved with a higher down payment, is viewed more favorably by lenders and can lead to better interest rates. The appraisal’s role is central to the lender’s risk assessment, directly impacting loan terms and ensuring the loan aligns with the collateral’s market worth.

Addressing an Appraisal Value Below Purchase Price

A common challenge arises when the appraised value is lower than the agreed-upon purchase price, creating an “appraisal gap.” In such situations, several options are available to both buyers and sellers to keep the transaction moving forward. One common approach involves the buyer paying the difference between the appraised value and the purchase price out of pocket. This requires the buyer to bring additional cash to closing beyond their initial down payment and closing costs.

Alternatively, the buyer and seller can renegotiate the purchase price, asking the seller to reduce it to match the appraised value or to meet somewhere in the middle. This negotiation is often facilitated by an appraisal contingency clause in the purchase contract, which allows the buyer to back out of the deal without losing their earnest money if the appraisal comes in low. If factual errors or overlooked comparable sales are identified in the appraisal report, the buyer or their agent can request a reconsideration of value from the lender. Challenging an appraisal can be difficult and does not guarantee a change, but it is an option if legitimate grounds exist. Should negotiations fail and the appraisal contingency be in place, the buyer retains the option to walk away from the deal, retrieving their earnest money deposit.

Completing the Transaction After Appraisal

Once the appraisal hurdle is successfully navigated, the transaction moves into its final stages. The final loan underwriting process follows a cleared appraisal. Underwriters meticulously review all financial documentation, including the appraisal report, to ensure the borrower meets all eligibility requirements and the loan poses an acceptable risk to the lender. This stage can involve requests for additional documentation to satisfy any remaining conditions.

A title search is conducted to ensure the property’s legal ownership is clear and free of any liens, judgments, or other encumbrances that could affect the buyer’s ownership. Title insurance is then secured to protect both the lender and the buyer against future title issues. With the loan nearing final approval, the closing date is scheduled, often several weeks after the appraisal is cleared. Before closing, buyers typically conduct a final walkthrough of the property, usually within 24 to 48 hours beforehand, to confirm its condition has not changed. On closing day, all necessary documents are signed, funds are transferred, and ownership is legally conveyed, culminating in the buyer receiving the keys to their new home.